Chap 03 - The Gains from Trade Flashcards
Why do nations trade?
Trade allows specialization, increases total production, and improves living standards.
What is economic interdependence?
People and nations rely on each other for goods and services.
What is the key idea behind trade?
Trade makes everyone better off.
What is absolute advantage?
The ability to produce a good using fewer inputs than another producer.
What is comparative advantage?
The ability to produce a good at a lower opportunity cost than another producer.
Why does comparative advantage matter more than absolute advantage?
Trade benefits both countries when they specialize based on comparative advantage.
What is opportunity cost?
What must be given up to produce something else.
How does opportunity cost determine specialization?
A country should specialize in the good where it has the lower opportunity cost and trade for the other good.
In the U.S.-Japan example, which country has a comparative advantage in airplanes?
Japan, because it gives up fewer soybeans to make one airplane.
Which country should specialize in soybeans?
The U.S., because it has a lower opportunity cost in soybean production.
What are exports?
Goods produced domestically and sold abroad.
What are imports?
Goods produced abroad and sold domestically.
What are the terms of trade?
The exchange rate of goods between countries.
How do both countries benefit from trade?
When the trade price is between the opportunity costs of both countries.
If 1 airplane trades for 40 tons of soybeans, which country benefits?
Both, because Japan’s opportunity cost is 25 soybeans and the U.S.’s is 50 soybeans.
Why does trade increase total production?
Specialization allows each country to produce more efficiently.
What determines trade: absolute or comparative advantage?
Comparative advantage, because it considers opportunity cost.
What must the price of trade be?
Between the opportunity costs of both countries.
What is a downside of trade?
Some industries may be negatively impacted, even if the overall economy benefits.
